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Who pays for our Scottish railways?

Transport Scotland recently published its consultation document on the future of rail services in the country. Scotland’s passenger railways are broadly a £1bn a year business with 26% of revenue coming from passengers and the remainder from tax payers – of whom a minority are also rail users. (This covers just Scotrail operations and excludes cross border services provided by other operators as well as rail freight.)

The consultation document raises the question of what should be the balance between rail users and taxpayers in terms of paying for rail services. The implication being that the present split is not seen as equitable. The recent funding of London’s Crossrail (whilst an infrastructure project) provides an interesting precedent about how rail services might be funded with its a third, a third, a third funding package. That is a third of the money comes from users, a third from businesses and a third from general taxes. The logic behind this funding arrangement is broadly as follows. Passengers obviously benefit from the service so should contribute to it. Businesses (ie employers) in locations served by the rail network benefit from being able to draw upon a larger labour pool to recruit from which reduces wages and improves competitiveness while not having to provide so much car parking. Whilst the general public benefits from a reduced number of cars on the road network, so benefits from less congestion and pollution as well as reducing the need to invest in new road infrastructure.

So what would be the implications of such a funding regime in Scotland? If passengers were to pay a third of the cost of services this would require (all other things being equal) fares to rise by 27%. If we assume that such a funding package were to be phased in over say a five year period this would require annual real fare rises of 2.5% if passenger numbers also grew at 2.5%. This would mean that the present average single fare of £3.30 per single trip would increase to £3.70 in present prices by year 5.

The second source of funding, from businesses, could be based on the French “versement transport” which is a hypothecated local tax levied on the total gross salaries of employees. In France the rate varies by area and is applicable only to companies of more than nine employees. It is highest in Paris where the rate is 2.6%. To keep it simple in this example we have assumed the levy will be paid by everyone employed in those local authority Districts where at least 4% of the workforce commute to work by rail and that the levy will need to raise £330m a year. Based on the 640,000 people employed in these Districts and average wages within them this would equate to a levy on wages of 1.9%. In the context of France this a high levy especially as it only covers national rail services and few employers benefit from their staff commuting by rail.

The balance of funding would come from general taxpayers and in this third/third/third model would see a reduction in the amount sought per household from £315 per household now down to £140 per household.

The above analysis highlights some of the issues of rail funding in Scotland. It is difficult to see how the “a third, a third, a third funding package” could work given the high level of contribution required from employers in relation to the low number of rail commuters. However, even with considerable above inflation fare increases and assumed growth in rail patronage it is difficult to see passenger revenues covering much more than a third of operating costs.

This suggests, that if the present funding split is not acceptable, the need to identify either new sources of finance or to significantly reduce costs including closures to improve the financial sustainability of Scotland’s passenger rail services.